Introduction

Qualified tuition programs (QTPs) are also called “529 plans.”

States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's
qualified education expenses at a postsecondary institution. Eligible educational institutions may establish and maintain
programs that allow you to prepay a student's qualified education expenses. If you prepay tuition, the student (designated
beneficiary) will be entitled to a waiver or a payment of qualified education expenses. You can't deduct either payments or
contributions to a QTP. For information on a specific QTP, you will need to contact the state agency or eligible educational
institution that established and maintains it.

What is the tax benefit of a QTP?
No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted
qualified education expenses. See Are Distributions Taxable, later, for more information.

What Is a Qualified Tuition Program?

A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for
paying, a student's qualified education expenses at an eligible educational institution. QTPs can be established and maintained
by states (or agencies or instrumentalities of a state) and eligible educational institutions. The program must meet certain
requirements. Your state government or the eligible educational institution in which you are interested can tell you whether
or not they participate in a QTP.

Qualified education expenses.
These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). As shown in the following list, to be qualified, some of the expenses must be required by the institution
and some must be incurred by students who are enrolled at least half-time. See Half-time student, later.

The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution.

Tuition and fees.

Books, supplies, and equipment.

Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or
attendance at an eligible educational institution.

Expenses for room and board must be incurred by students who are enrolled at least half-time.

The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of
attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You may need to contact the eligible educational institution for qualified room and board costs.

The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it is to be
used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.
(This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational
in nature.)

Designated beneficiary.
The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits.
The designated beneficiary can be changed after participation in the QTP begins. If a state or local government or certain
tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the
person who receives the interest as a scholarship.

Half-time student.
A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing,
as determined under the standards of the school where the student is enrolled.

Eligible educational institution.
For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution
eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all
accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational
institution should be able to tell you if it is an eligible educational institution.

Certain educational institutions located outside the United States also participate in the U.S. Department of Education's
Federal Student Aid (FSA) programs.

How Much Can You Contribute?

Contributions to a QTP on behalf of any beneficiary can't be more than the amount necessary to provide for the qualified education
expenses of the beneficiary. There are no income restrictions on the individual contributors.

You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary.

Recontribution of Refunded Amounts

If a student receives a refund after December 31, 2014, of qualified education expenses that were treated as paid by a QTP
distribution, the student can recontribute these amounts into a QTP for which they are the beneficiary within 60 days after
the date of the refund to avoid the need to figure the taxable part of the QTP distribution. For refunds received after December
31, 2014, and before December 18, 2015, a transition rule allows the student to recontribute these amounts by February 16,
2016.

Are Distributions Taxable?

The part of a distribution representing the amount paid or contributed to a QTP doesn't have to be included in income. This
is a return of the investment in the plan.

The designated beneficiary generally doesn't have to include in income any earnings distributed from a QTP if the total distribution
is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution, later).

Earnings and return of investment.You will receive a Form 1099-Q from each of the programs from which you received a QTP distribution in 2015. The amount of
your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return
of investment (box 3). Form 1099-Q should be sent to you by February 1, 2016 (January 31 is a Sunday).

Figuring the Taxable Portion of a Distribution

To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must
compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses.

Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Taxable earnings.
Use the following steps to figure the taxable part.

Multiply the total distributed earnings shown on Form 1099-Q, box 2, by a fraction. The numerator (top part) is the adjusted
qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during
the year.

Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include
in income. Report it on Form 1040 or Form 1040NR, line 21.

Example 1.

In 2008, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Over the
years they contributed $18,000 to the account. The total balance in the account was $27,000 on the date the distribution was
made. In the summer of 2015, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year.
She paid her college expenses from the following sources.

Gift from parents

$1,600

Partial tuition scholarship (tax free)

3,100

QTP distribution

5,300

Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses
by any tax-free educational assistance.

Total qualified education expenses

$8,300

Minus: Tax-free educational assistance

−3,100

Equals: Adjusted qualified education expenses (AQEE)

$5,200

Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable.

Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Sara figures the taxable part of the distributed earnings
as follows.

1.

$950 (earnings)

×

$5,200 AQEE

$5,300 distribution

= $932 (tax-free earnings)

2.

$950 (earnings)−$932 (tax-free earnings)

= $18 (taxable earnings)

Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education
expenses.

Coordination With American Opportunity and Lifetime Learning Credits

An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes
a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits. This means that after the
beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by
the expenses taken into account in determining the credit.

Example 2.

Assume the same facts as in Example 1, except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses).

Total qualified education expenses

$8,300

Minus: Tax-free educational assistance

−3,100

Minus: Expenses taken into account in figuring American opportunity credit

−4,000

Equals: Adjusted qualified education expenses (AQEE)

$1,200

The taxable part of the distribution is figured as follows.

1.

$950 (earnings)

×

$1,200 AQEE$5,300 distribution

= $215 (tax-free earnings)

2.

$950 (earnings)−$215 (tax-free earnings)

= $735 (taxable earnings)

Sara must include $735 in income (Form 1040, line 21). This represents distributed earnings not used for adjusted qualified
education expenses.

Coordination With Coverdell ESA Distributions

If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of
these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated
between the distributions. For purposes of this allocation, disregard any qualified elementary and secondary education expenses.

Example 3.

Assume the same facts as in Example 2, except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from
her Coverdell ESA. In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between
the two distributions.

$1,200 AQHEE

×

$700 ESA distribution$5,300 total distribution

=

$158 AQHEE (ESA)

$1,200 AQHEE

×

$4,600 QTP distribution$5,300 total distribution

=

$1,042 AQHEE (QTP)

Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158,
and the taxable portion of her QTP distribution based on the other $1,042.

Coordination With Tuition and Fees Deduction

A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as
long as the same expenses aren't used for both benefits.

Losses on QTP Investments

If you have a loss on your investment in a QTP account, you may be able to claim the loss on your income tax return. You can
claim the loss only when all amounts from that account have been distributed and the total distributions are less than your
unrecovered basis. Your basis is the total amount of contributions to that QTP account. You claim the loss as a miscellaneous
itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income
limit.

The aggregation rules discussed below have been eliminated for distributions after 2014. For more information, see What's New for 2015 at the beginning of this publication.

If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution,
basis, etc.) from all such accounts in order to determine your taxable earnings for the year. By doing this, the loss from
one QTP account reduces the distributed earnings (if any) from any other QTP accounts.

Example 1.

In 2015, Taylor received a final distribution of $1,000 from QTP #1. His unrecovered basis in that account before the distribution
was $3,000. If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040).

Example 2.

Assume the same facts as in Example 1, except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2015 of $10,000. His
total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Taylor's adjusted qualified education
expenses for 2015 totaled $6,000. In order to figure his taxable earnings, Taylor combines the two accounts and determines
his taxable earnings as follows.

1.

$10,000 (total distribution)−$4,500 (basis portion of distribution)

= $5,500 (earnings included in distribution)

2.

$5,500 (earnings)

x

$6,000 AQEE $10,000 distribution

=$3,300 (tax-free earnings)

3.

$5,500 (earnings)−$3,300 (tax-free earnings)

=$2,200 (taxable earnings)

Taylor must include $2,200 in income on Form 1040, line 21. Because Taylor's accounts must be combined, he can't deduct his
$2,000 loss (QTP #1) on Schedule A (Form 1040). Instead, the $2,000 loss reduces the total earnings that were distributed,
thereby reducing his taxable earnings.

Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.

Exceptions.
The 10% additional tax doesn't apply to the following distributions.

Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he
or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine
that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USNA at Annapolis).
This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education
(as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

Exception (3) applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.

Figuring the additional tax.Use Part II of Form 5329 to figure any additional tax. Report the amount on Form 1040, line 59, or Form 1040NR, line 57.

Rollovers and Other Transfers

Assets can be rolled over or transferred from one QTP to another. In addition, the designated beneficiary can be changed without
transferring accounts.

Rollovers

Any amount distributed from a QTP isn't taxable if it is rolled over to another QTP for the benefit of the same beneficiary
or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). An amount is rolled over
if it is paid to another QTP within 60 days after the date of the distribution.

Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. These aren't taxable
distributions.

Members of the beneficiary's family.
For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of
the beneficiary.

Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

When Aaron graduated from college last year he had $5,000 left in his QTP. He wanted to give this money to his younger brother,
who was in junior high school. In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron
contributed the same amount to his brother's QTP within 60 days of the distribution.

If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer
to any QTP for that designated beneficiary.

Changing the Designated Beneficiary

There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's
family. See Members of the beneficiary's family, earlier.

Example.

Assume the same situation as in the last example. Instead of closing his QTP and paying the distribution into his brother's
QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to
that of his brother.